The adoption of techniques demonstrates that current global competitive market conditions require firms to compete on quality and costs. I\s evidence or the importance or quality, the Mathematical Organization for Standardization has developed quality standards .recurred to as [SO 9()OO, These standards identify quality guidelines for design development, production, inspection. installation, and servicing of products and services. Many purchasers of goods and services require the supplier to be “ISO 9000 certified,’ Certification requires a third-party detailed audit and documentation of the processes and procedures of, the supplier for quality conformance. U.S. auto manufacturers have developed their own similar set of standards, QSO 9000, and require their suppliers to have this quality certification. Thus the cost of ignoring quality is very high, most notably from lost sales. Companies that are able to compete globally on quality and cost inevitably have well-developed total quality management (fQM) processes. Total quality management includes assigning responsibility for managing quality. providing good quality measures for decision making, and evaluating and rewarding quality performance. Accountants participate in this measurement and reporting process by designing systems that can track quality and assign cost to quality failures.

Components of the Cost of Quality Four

components of quality are myopically considered when designing a measurement intern to track quality costs Prevention costs ‘arc the cost .of resources consumed in activities that prevent defects from occurring. Examples include employee training, quality process audits, quality concern issues embedded in target costing processes for new products, and supplier quality evaluations (ISO 9(00). Appraisal costs are incurred to ensure that products conform to quality standards. Examples include inspection of raw materials, in-process inventories. and finished goods; inspection and monitoring of production processes; and equipment inspection and
maintenance programs to ensure quality Internal [allure costs include additional production-related costs incurred to correct low-quality output. Examples include rework, downtime. engineering change orders,’ scrap. retesting, and inspection.



The graph demonstrates that as’ more resources are consumed in the prevention and appraisal categories, the costs associated with, external and internal failures will decline. Designing processes to produce high-quality units through prevention of failures pays off in lower rework, higher customer satisfaction, more’ repeat business,
and lower warranty costs, among other benefits. A focus on prevention occurs during the target costing process described earlier. But prevention also includes identifying high-quality suppliers, as discussed in the. section about just-in-time inventory procedures.

The arrows have been included in the graph above to show a phenomenon that has been occurring over the past 20 years., Prior to, computerized equipment becoming commonplace in manufacturing plants and offices, quality had to be inspected into the product through the consumption of labor resources. Using labor to inspect all incoming raw materials, work in process on the shop floor, and finished goods is very expensive and not as reliable as might be desired. The use of computerized technology to perform
quality inspections has reduced appraisal costs and improved appraisal reliability. The reduction in appraisal and prevention costs has shifted the cost curves, making high quality a less costly option.

A second, important development leading to the prominence of TQM is the recognition of the interconnections of the value chain. If quality is low in one part of the value chain, quality costs can increase for all components in that chain. A supplier providing low-quality inputs can cause the buyer to incur rework and warranty expenses. A retailer that provides low-quality access for the consumer will hurt sales and affect the ‘entire value chain. Therefore, the entire value chain must be encompassed in a total quality management approach

xu Instrumentalist Materials and Control Group tracker Its cost of quality categories ovular a six year period In the late 19808. It discovered that after the Initial adoption of RAM practices. prevention
and appraisal costs increased and remained fairly constant over the six-year period. However, as the six-year period wore on, failure costs declined, causing the total cost of quality to decrease, Many of these prevention-related costs Were associated with ensuring high-quality in CASE IN POINT puts through managing supplier relations.

Measuring file Cost out Quality

Quality multidimensional concept, Multiple measure: arc necessary
to capture the varied aspects of quality. Most firms begin by creating a cost of quality report based-on the four components of quality discussed previously, The following table is an example of such a quarterly report for Boards and More. Inc


Simply reporting quality costumes not help companies manage the associated activities. Twenty thousand dollars in IOSI sales is a significant non-value-added cost that Boards and More would like to eliminate, In order 10 eliminate these costs. management must understand and track the activities that created them. In other words. management. must determine the cost driver: or lost sales. rework, warranty costs. and so on. Measuring and managing: quality requires multiple measures or these cost drivers. Thus timer satisfaction surveys, vendor rating systems, or manufacturing’ defect rates. downtime. on-time deliveries, and so on are tracked and measured by companies using total quality management approaches.

You as an equipment Repair Manager Assume that It Is your responsibility to maintain equipment at Board$ and More and that you have Just received the Quarterly quality report shown on the previous page. The manager of the production line suggests that scrap and rework are high because the equipment has not been properly maintained. What types of trade offs are Involved In scheduling equipment for routine maintenance? What other cost drivers could explain high scrap and’rework coats? ‘Our comments appear on page 822.

One frequent quality measure is the defect rate. Some’ companies require their suppliers to provide evidence of inspection quality and defect rates before they are added to preferred supplier lists. A defect rate is commonly measured in puts per million, An item can be classified as defective if it does not meet specified standards or tolerance limits. These rates are typically tracked at inspection points.

Productivity and Quality

Measuring quality without, simultaneous concern for productivity can be a recipe for bankruptcy. Quality and productivity are ultimately linked, and managers prefer to undertake activities that reduce the costs associated with low quality and increase pnxhictivity, Fortunately, this,is often possible, Managers frequently find that activities that reduce scrap and rework also increase productivity. Productivity is usually measured by comparing inputs and outputs. Quality improvements are evident when the amount of input is reduced for’ a given, fixed level of output. In the quality cost-report, the column labeled “Percentage of Sales” is a productivity
measure. The outputs are sales dollars and ‘the inputs are the resources consumed by quality-related activities. Increases in quality for Boards and More are signaled by a decrease in the total quality cost as a percentage of sales dollars. Earlier in this chapter,
we discussed another productivity measure-the JIT manufacturing efficiency ratio, It’ compares the input, value-added time, and the output, cycle time, to obtain-a meas!, of productivity throughput.

Posted on November 23, 2015 in Costing and- the Value Chain

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